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Credit Card Rebate and Reward Programs: Real Deal or Rip-Off?

Last Updated: May 7, 2010

The answer can be either; truthfully, it is up to you, the consumer, to choose and use these wisely! About 85 percent of U.S. households participate in at least one credit card rewards program, according to a recent study by Consumer Reports. Before you even think about adding yet another credit card to your collection, be certain that you have the available finances, and can be disciplined enough, to be able to buy only items you need and pay off the card balance in full each month. The Consumer Reports study found that confusing rules and restrictions made many of the reward cards more trouble than they're worth to consumers, and in some cases encouraged them to spend more than necessary. But if you DO have the discipline, read the fine print, and follow the rules, then cash-back and rebate cards can be a great income bonus, more or less free money for items you have to buy anyway. Sounds like a real deal to me, and I capitalize on them to the tune of up to about $800 a year!

History of Reward, Rebate, Cash-back Cards

According to Curtis Arnold, founder of cardratings.com, Discover introduced the first no-fee cash-back credit card on Superbowl Sunday 1986 during the much anticipated "commercial hour". Over potato chips and beer, consumers were stunned to learn that for no annual fee, they could get a cash rebate of up to 1% on every purchase, an unheard of deal at the time. Soon following was the birth of airline rewards cards, Citibank's AAdvantage card debuted in 1987, and people began to see the appeal of these cards in droves. To this day, now that almost every card issuer has jumped on the bandwagon, the competition is stiff and credit card companies have marketing departments that are constantly barraging consumers with new types of "great" offers and bonus rewards... and the list goes on and on. However, their competition benefits us in the form of better and bigger rewards, thus I don't mind the marketing barrage too much.

Rebate, Reward, Cash-Back - Choose Wisely

We will be emphasizing this often in this article, so I apologize in advance if you tire of hearing it: If you don't think you'll be able to pay off your balance in full each month, do not choose a reward card. Choose a card that has the lowest APR if you need to carry a balance; there are plenty of these available. Better yet, avoid credit altogether. Although cash back and rebate/reward credit cards can offer some relief for costly essential items, they often carry higher annual percentage rates than traditional credit cards, according to Consumer Reports. Looking at some of the more generous credit card rewards programs, the study found that rates varied from 9.75% to as much as 19.99%; any "savings" reaped by the reward is quickly eliminated by high APRs. Beware, though: Marketers usually offer rewards programs to sucker customers into signing up for cards with high APRs. But if you can guarantee that you'll be able to pay your charges off each month in full, you can reap the benefits of this marketing strategy without the extra interest. If you know you won't be paying off your bill each month, you should find a card with a low APR. These days, anything in the single digits is good, though if you look around and your credit is good, you should find rates in the 7% to 9% range; even lower for temporary "teaser rates."

Let's get back to the question at hand, now that we've disclaimed multiple times; there are so many offers out there in my mailbox, internet, TV and newspapers; which type of rewards program is best? The answer is, (now that we've determined you'll pay this off each month) that totally depends of you; your lifestyle, the products you buy (need) regularly, services you utilize, how much you travel, the amount of money you spend each month. Here is a short list of some of the most common scenarios offered by credit card companies:

• Airline Rewards Cards. Extremely popular, but sometimes difficult to reap the benefits due to blackout dates, expiration, and simple lack of availability. If you travel alot and have flexibility in your schedule, this type of credit card may be optimum for you. On the "plus" side, many cards offer large "bonus" miles upon sign-up, thus you may be eligible for a free ticket in very little time, at least initially. Cons: In most cases, you need to use airline miles fast: airlines are always changing their redemption rules, and considering how much the big carriers are struggling these days, holding onto unused miles can cost you. Additionally, you need to consider fee such as "booking fees" and annual fees (if applicable) as often the airline rewards cards will have annual fees associated with them; it is crucial to determine if the fees outweigh the potential rewards.
• Cash-back Cards. According to a 2007 online poll conducted by CardTrak LLC, 56% of Americans prefer cash-back rewards cards (compared to 12% favoring airline miles). And they are right on target; good old fashioned cash can be used for any purchase, and the cash back accumulates without you actually having to do anything. The typical account of this type will post credits ranging from 1% to 5%, usually up to a monthly limit (or "cap") of about $500 dollars of spending in the "appropriate" categories, depending on the card. Once you accumulate a minimum amount of cash or points credit (anywhere from $20 to $50) you typically can request account credit, ask for a check to be mailed to you, or use the money to purchase goods in a designated "store" (avoid this waste at all costs!). The exception to this, the Discover® More(SM) Card (and possibly other card issuers) offer you a "bonus" of 10-25% if you redeem your cash or points for gift cards; if the gift card is for a product or service you need anyway (I always get Staples Gift Cards: I always need some office supply!) and I get a $50 gift card instead of $40 cash or account credit.
• Gas Rewards Cards. There are some great credit cards out there that provide rebates (or cashback) specifically on purchases at qualifying gas stations. Traditionally, gas cards have been affiliated with the big oil companies (such as Shell, Mobil, etc) but this ties you to one particular brand (and often, the savings is "negated" by higher prices for "name brand" gas). There are credit cards available from Discover, for instance (the Open Road Card) that gives you 5% cashback at any gas station (up to $100 a month). I use this card religiously for my first $100 (who can get away with only that per month anymore?) then I use my Chase Freedom card, which provides 3% back on everyday purchases (gas, grocery stores, and drug stores) for the remainder of the month's gas purchases. And given that I have a gas bill of roughly $400/month, this equates to a savings of about $15/month.

Reminders and Suggestions For Using Rewards, Rebate, and Cash-Back Cards

1. Skip credit cards altogether if you carry a balance. If you don't pay your bills off in full, you may want to pass on the rewards cards altogether. Because rewards cards often have higher interest rates, you may end up paying much more in interest than you reap in rewards.
2. Consider where you shop. Opt for cards that will earn rewards at stores and services you use most often, or offer savings on items that you actually buy regularly; this will maximize your rebate based on your individual spending patterns.
3. Carefully review reward program rules; if bonus categories are "everyday purchases" read the fine print or better yet, call the company and ask if X, Y, or Z qualify.
4. Always review your monthly statements and track points or cashback levels.
5. Keep your eyes open for new (better) offers; competition stimulates change, so set loyalty to any particular card aside.
6. Avoid cards with annual fees if possible; do the math if you must.
7. Charge as much of your required monthly expenditures as possible.
8. Avoid temptation. Research has shown that credit card customers are tempted to charge more in order to earn points toward a reward, in essence overspending for a "freebie" they don't even need.

Rebate and reward cards are an ever-evolving business; you have to keep on top of the game, pay off the balances each month, and know the fine print. If you can control your expenditures to items you need, without adding extra expense just to obtain rewards, they can be a great way to supplement income with little effort on your part.